Banco Macro S.A.

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Banco Macro's 4Q19 earnings conference call. We would like to inform you that the 4Q19 press release is available to download at the Investor Relations website of Banco Macro, www.macro.com.ar slash relations hyphen inversors slash. Also, this event is being recorded and all participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there will be a question and answer session. At that time, further instructions will be given. Should any participant need assistance during the call, please press star zero to signal the operator. It is now my pleasure to introduce our speakers. Joining us from Argentina are Mr. Gustavos Manriquez, Gustavo Manriquez, Chief Executive Officer, Mr. Jorge Scorinci, Chief Financial Officer, and Mr. Nicolas Torres, IR. Now I will turn the conference over to Mr. Nicolas Torres. You may begin your conference, sir.

Good morning and welcome to Banco Macro's 4Q19 conference call. Any comment we may make today may include forwarded statements which are subject to various conditions. and these are outlined in our 20F, which was filed to the SEC, and it's available at our website. 4Q19 press release was released yesterday, and it's also available at our website. I will now briefly comment on the bank's 4Q19 financial results. Bank of Macro's net income for the quarter was 13.3 billion pesos, 1% higher than in 3Q19, and 150% percent higher than the 5.2 billion pesos posted a year ago, based on an increase in net interest income and in net fee income. The banks for Q19 accumulated ROE and ROA of 59 percent and 10.4 percent respectively, remained healthy, and showed the banks' earnings potential. On a fiscal year basis, Banco Macro earned 40.8 billion pesos in fiscal year 2019. 159% higher than the 15.7 billion pesos earned in fiscal year 2018. Net operating income before general and personal expenses for 4Q19 was 29.7 billion pesos, increasing 13% of 3.5 billion pesos water, and 83% higher than a year ago. Operating income after general administrative expenses and personal expenses was 16.4 billion pesos, 38% or 4.5 billion pesos higher than in 3Q19, and 117% or 8.9 billion pesos higher than in 4Q18. In fiscal year 2019, operating income totaled 48.1 billion pesos, 114% higher than in fiscal year 2018. In the quarter, net interest income totaled 22.7 billion pesos, 13% or 2.7 billion pesos higher than the result posted in 3Q19, and 85% or 10.4 billion pesos higher than the result posted one year ago. This performance can be traced to an 8% quarter-on-quarter decrease in interest income and a 35% decrease in interest expenses. In fiscal year 2019, Net interest income total $72.5 billion, 83% higher than the $39.6 billion registered in fiscal year 2018. In Q19, interest income total $32.8 billion, 8% or $2.8 billion lower than in Q19, and 38% or $9 billion higher than the previous year. Within interest income, interest on loans increased 38% or 6.1 billion pesos quarter-on-quarter and 42% year-on-year. In 2019, interest on loans represented 67% of total interest income. During fiscal year 2019, interest on loans totaled 67.5 billion pesos, increasing 42% compared to fiscal year 2018. Net income from government and private securities decreased 49% or 9.5 billion pesos quarter-on-quarter due to lower LELIX volume and lower interest rates. Compared to 4Q18, net income from government and private securities increased 25% or 2 billion pesos. In fiscal year 2019, net income from government and private securities totaled 53.8 billion pesos, 204% higher than in fiscal year 2018. In 4Q19, FX gains, including investment in the realty financing, total a 1.3 billion pesos gain. During fiscal year 2019, FX gains totaled 3.1 billion pesos compared to a 1.4 billion pesos loss posted in fiscal year 2018. In 4Q19, interest expenses totaled 10.1 billion pesos, 35% of 4.4 billion pesos decrease compared to 4Q19. and 12% or 1.4 billion pesos lower on a yearly basis. Within interest expenses, interest on deposits decreased 34% or 4.8 billion pesos quarter on quarter, mainly driven by an 18% decrease in the average volume of time deposits and a 21.4 percentage points decrease in the average time deposit interest rates. On a yearly basis, interest on deposits decreased 12% or 1.3 billion pesos. In 4Q19, interest on deposits represented 93% of the bank's financial expenses. In fiscal year 2019, interest expense totaled 51.6 billion pesos and was 99% higher than in fiscal year 2018. As of the fourth quarter of 2019, the bank's accumulated net interest margin, including FX, was 21.1%, higher than the 19.1% posted in 3Q19 and the 14.9 registered in fall Q18. In fall Q19, net fee income totaled 4.1 billion pesos, 10% higher than in Q19, and on a yearly basis, net fee income increased 32% or 1 billion pesos. In fiscal year 2019, net fee income totaled 14.6 billion pesos, increasing 31% compared to fiscal year 2018. In fall Q19, net income from financial assets and liabilities at fair value for profit and loss totaled 2.6 billion pesos, increasing 292% or 1.9 billion pesos compared to 3Q19. In fiscal year 2019, net income from financial assets and liabilities at fair value for profit and loss totaled 5.3 billion pesos gained, 402% higher than in fiscal year 2018. In the quarter, other operating income totaled $926 million, decreasing 9% compared to Q19, and on a yearly basis, other operating income increased 69% of $378 million. In fiscal year 2019, other operating income totaled $6.1 billion, 117% higher than in fiscal year 2018. In Q19, Bank of America's personal and administrative expenses totaled $8.3 billion, 13% higher, or $941 million than the previous quarter. On a yearly basis, personal and administrative expenses increased 58% of $3 billion. In fiscal year 2019, administrative expenses plus employee benefits increased 64% compared to fiscal year 2018. As of December 2019, the accumulated efficiency ratio reached 32.3%, improving from the 33.2 posted in 3Q19 and 37.9% registered a year ago. In fiscal year 2019, Banco Macro's effective tax rate was 16.3%, lower than the 30.7% registered during fiscal year 2018. During 2019, and in accordance with applicable income tax law and regulations and the evolution of consumer price index, the bank decided to adjust income tax by inflation. In terms of loan growth, the bank's financing to the private sector grew 10% or 18.7 billion pesos quarter-on-quarter and 22% or 38.6 billion pesos year-on-year. Within commercial loans, growth was driven by overdraft and others with a 32% and a 52% increase quarter-on-quarter respectively. On the consumer side, growth was driven by credit card loans which grew 27% or 9 billion pesos in the quarter. It is important to mention that Banco Marcos market share over private sector loans as of December 2019 reached 8.1%. On the funding side, total deposits increased 1% or 3.7 billion pesos quarter-on-quarter and increased 10% or 24.9 billion pesos year-on-year. Private sector deposits increased 3% quarter-on-quarter, while public sector deposits decreased 14% quarter-on-quarter. The increase in private sector deposits was led by demand deposits, which increased 17% or 18.5 billion pesos quarter on quarter, while time deposits decreased 11% or 13.2 billion pesos. Within private sector deposits, special deposits increased 2% or 4.3 billion pesos, while US dollar deposits decreased 6% or 84 million dollars. As of December 2019, Banco Macro's transactional accounts represented approximately 54% of total deposits. Banco Macro's market share of private deposits as of December 2019 totaled 6.2%. In terms of asset quality, Banco Macro's non-performing total financial ratio reached 2.07% and the coverage ratio reached 123.08%. In terms of capitalization, Banco Macro accounted for an excess capital of 69 billion pesos, which represented a total regulatory capital ratio of 27.3% and a Tier 1 ratio of 20%. The bank's aim is to make the best use of this excess capital. The bank's liquidity remained more than appropriate. Liquid assets to the deposit ratio reached 59%. Overall, we have accounted for another positive quarter. We continue to show it a solid financial position. Asset quality remains under control and closely monitored. We keep on working to improve more our efficiency standards, and we keep a well-atomized deposit base. At this time, we would like to take the questions you may have.

Thank you. At this time, we're going to open it up for question and answers. If you'd like to ask a question, please press star 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Today's first question comes from Ernesto Gabriando of Bank of America. Please go ahead.

Hi, good morning, Gustavos, Jorge, and Nicolas, and thanks for the opportunity to make questions. My first question is on your long-growth expectations. We have seen lower interest rates. We failed to see credit demand above inflation. Well, yesterday we saw the introduction of some caps on interest rates. So I remember in the former administration, this incentivized some of the banks from lending. So any color and this will be much appreciated. And then on my second question is on the hyperinflation accounting. I think you will be reporting it next quarter. So just wondering if you have estimated how was your 2019 ROE, including hyperinflation accounting. And then for my last question, do you see the possibility of the net earnings contracting in 2020 or showing lower earnings growth due to lower security gains and still soft credit demands? Thank you.

Hi, Ernesto. This is Jorge Carinzi answering. How are you? The first part is a question about long-growth expectations. Honestly, it's not very easy to project or to forecast in this volatile scenario, but in general terms, we are forecasting long-growth to be slightly below inflation expectations, considering that The market consensus is expecting inflation to be in the area of 45, so therefore we are looking for nominal growth of loans a little bit below that. In terms of the caps on interest rate that yesterday the central bank said, I think that we have been commenting about the probability of these measures to happen, finally They appeared here according to this cap on interest rates on credit cards at the level of 55% starting as of March. And at the same time, there was some decrease in reserve requirements tied to credit card operations. The net of this on the P&L shows, of course, making a forecast on interest rates, make a net positive impact of approximately 100 million pesos in 2020. Then, on your question about inflation accounting, we are going to start reporting adjusted numbers in the first quarter of 2020, and we are working on that. In terms of ROE adjusted by inflation in 2019, it's in the area of 18%. So that is basically the question that you have. I don't know if I'm missing someone.

Yes, thank you. So just the last one. Considering that probably you will see lower security gains in 2020, I don't know if you should see lower earnings growth or actually earnings contracting in 2020.

Yeah, if you only look at security gains, it could be. Of course, for the moment, interest rates are lower than the ones that we saw last year, even though banks in general try to defend the margin as much as we can, and that is something that we are working on. But of course, everything has a limit in the sense that if we see more downward pressure on interest rates and on security rates, we will try to translate that to depositors At some point, depositors will not convalidate that. So until we reach that point, we will try to defend the margin as much as we can. So we are trying to maintain the ROE levels for 2020 in real terms, similar than the one that we posted in 2019. But again, we are in February. There's still 10 more months to come in Argentina, and that's a lot of time. The scenario could change from one month to the other, but basically the idea that we have for the moment is to try to maintain the adjusted ROE in 2020.

Perfect. Thank you very much.

Welcome. And our next question today comes from Gabriel Nobrega of Citibank. Please go ahead.

Hi, everyone. Good afternoon, and thank you for the opportunity to ask questions today. I have a first question actually on the top down that you were seeing. It's already been two months that the new administration has come in. I understand the situation isn't still as clear as we had thought, mainly because the administration is still talking about the bonds and the restructuring of the debts. But having said this, What do you believe will be the main challenges and opportunities that you could have over this year? And what are you implementing? What strategies are you implementing in order to tackle these two fronts? And I'll make a second question afterwards. Thank you.

Hi, Gabriel. How are you? Yes, you're right. We thought that at this point we could have a better or clearer landscape on 2020. However, we are still working and dealing with volatile scenarios and with the government that has not announced an economic program yet. The debt restructuring is the main issue for the government. And honestly, we still do not know exactly at what time that is going to be finally solved. So for the moment, I would say that economic activity continues to be very sluggish. According to market consensus, GDP is expected to be minus 1% in real terms in 2020, inflation in the year of 45, as I commented in the previous question to Ernesto. So basically, challenges and opportunities is I mean, we have seen and we have sailed through this volatile scenario many times in the last 20, 25 years in Argentina. And Banco Macro has a high liquid position and excess capital that put us in the top ranking of solvency here in Argentina. So if there is an opportunity in terms of organic growth, we are going to go through that highway. If there is an opportunity through organic growth, we might take that one also. So we are going to, as Nicholas commented in the comments, we are going to make on the excess capital the best use that we consider and try to defend the margin as much as we can in this scenario of downward trend on interest rates.

All right, that's very clear, and thank you. And as for my second question, it's actually looking at your asset quality. We saw that provisions increased a lot, and I understand that this comes a lot from Vicentin, being that the loan went to Category 4 and you had to provision for this. I also understand there are other companies, but maybe looking forward, being that your NPO ratios also increased this year, do you expect... that you should make more provisions over the year to uncover these companies? And also, if you could just mention what coverage you have achieved for Vicentin, please.

As far as we continue to see luggage economic activity, I think that we might see more deterioration in asset quality. Even though that take into consideration that we have a 2% of MPL to total loans when the system is close to seven. So this is the result of many years of working on our correct standards and of course to have a consumer portfolio very tied to payrolls. But what you're right that we are seeing some corporate or commercial companies going into trouble. So the idea is that we want to maintain the coverage ratio in the area of 120 to 150. Byzantine is provisioned 100%. So going forward, again, if these economic situations continues for most of 2020, we could see NPLs in our, the NPL ratio going between 2.2, 2.4 by the end of the year. I'm maintaining, as I mentioned before, the coverage in the year 120, 140, approximately.

Can I just make a follow-up here? In this coverage which you are guiding between 120 and 140, are you already contemplating the implementation of the expected loss model under IFRS 9?

Uh, not if, I mean, we are going to start with that maybe by mid year. We have not started yet. All right. Clear. Thank you. You're welcome.

And our next question today comes from Domingos Falavina of JP Morgan. Please go ahead.

Thank you gentlemen. Also for taking the call. I just want to run through you the basic forecast, and I'm sorry if I missed that in the beginning. But like with an inflation of around 45, if you could just, you know, give even in ranges like, you know, loan growth 40 to 45, NII, you know, about the same as loan, cost of risk, effective tax rate. I understand your, you know, your goal is to kind of maintain a similar ROE 2020 over 19. But just, you know, so that we have, we understand it's volatile, Argentina, but just to have a directional view on how you guys are thinking about next year. About this year, sorry.

Hi, Domingos. Yeah, I mean, as I mentioned before, we're in February, and it happened to me in the last maybe two, three years at least that we were forecasting some scenario at the beginning of the year, and the scenario changed completely in the following months, and our expectations and forecasts were through to the trash.

Yeah, the same here, but always good to know what you think.

With inflation in the area of 40, you have to take into consideration long growth between 35 and 40, net interest income, an increase of maybe 25 to 30. The effective income tax rate is not easy to forecast in the sense that we are going to suppose adjusted inflation numbers, but it's going to be maybe in the area of what we posted in 2019. Deposit growth also similar and loan growth between 35 and 40. Expenses, those that In salaries, I think that negotiations have not started yet, but I think that salaries should be growing below inflation expectations, so between 35 and 40, I would assume. So for expenses, I would make an average growth of maybe 40 area per ox. Those are the main issues.

Yeah, the cost of risk, I think, is the only one we didn't touch.

Yeah, cost of risk, again, depending on market conditions, that could range between two and a half and three and a half.

Okay. And the last one... Okay. And the last one on my side is the growth should be more tilted to consumers, more corporates, SME. How exactly would you guess that?

The what, sorry?

The loan growth. Like the strategy for 2020 is originating in which segment?

No, I think that, I mean, should be, nominally speaking, both. I would assume that could be 60, 65% consumer and the rest commercial.

Super clear. Thank you.

You're welcome, Domingos.

And, ladies and gentlemen, as a final reminder, if you'd like to ask a question, please press star then 1. Today's next question comes from Carlos Gomez at HSBC. Please go ahead.

Yes. A couple of clarifications. Could you let us know where your average interest rate on credit cards was before the implementation of this gap at 55%? Second, for next year, your tax rate should be 30% again on your inflation-adjusted earnings. Is that correct? And finally, will the inflation adjustment be the same in your local currency statements as in your 20F? Thank you.

Hi, Carlos. How are you? The average rate before the 55% cap was 75. That's your first question. The second one, the statutory rate is 30%. But depending on the impact of the inflation, I think that the effective is going to be below that.

Sorry, the effective on the inflation-adjusted earnings or effective on the earnings without inflation adjustment?

Might be both, but I think that the effective on the adjusted numbers is going to be much lower than the 30.

OK.

I couldn't get the last question, Carlos.

Yes, I was wondering if the inflation adjustment, which we understand will be one line, I think after the pre-tax earnings, correct me if I'm wrong, if it will be the same in your local currency financial statements or in your 20th?

Not so sure. I mean, on the 20th, We are still debating that with external auditors, but on the local reporting and the central bank, we are going to report adjusted numbers.

Okay, and by the way, will you also guess the history? As in the past, you would give us inflation adjusted numbers, inflation adjusted historical numbers?

We're not so sure about that. If I had to answer now, I would say no, but we are still also working with our accounting department, the central bank, and external auditors on that because it's a very complicated calculation on that. So we are still trying to see if we have to or we have maybe a kind of approval from the central bank that we can report without the adjusted numbers of the previous years.

If you do have to present adjusted numbers, we beg you to present the nominal as well so that we can continue the historical series.

Okay, so I will send you, Esteban, a press release, a book.

Thanks, Carlos. Thank you so much.

And our next question comes from Santiago Petri of Templeton. Please go ahead.

Yes, hi, good afternoon, guys. Today there was a press report that states that this was related to fintech, so I would like to know if this impacts your activities in any sense, that it forbids the automatic deduction of the installments from loans from David, because I think it's So I would like to know how do you collect your loans and if this applies to you?

Hi, Santiago. No, basically, this measure has a much higher impact on the fintechs. Basically, when you have your client, an account with you, you have the possibility to deduct the installment of the personal loan or the credit card. as we have been doing for the last 15 years. So it's not impacting banks, basically. Okay, thanks. Thanks a lot. You're welcome, Santiago.

And our next question comes from Brian Flores of Citibank. Please go ahead.

Hi, thank you for the opportunity. Just a quick question on your funding cost. We saw it decreasing quarter on quarter recently, So I just wanted to think, I mean, sorry, to ask you, how are you thinking about this, particularly going forward, and how recurrent do you think this could be going forward? Thank you.

Of course, I think that some of this I mentioned that before. Banks always try to defend the margins, so we will try to translate 100% or the most as we can, the decrease on daily leaks rates, to our depositors, but of course, you have a limit. That's the point when the depositor says, I'm not going to renew this peso time deposit because it's well below inflation and well below what I have in mind for the effects depreciation. So I'm going to, instead of renewing that, I'm going to, I don't know, buy a fridge, buy a car, go on holidays, or maybe buy dollars on the informal market because we have effects control here. So there is a limit for the decrease on the funding cost going forward. I think that we are quite close to that limit. So I don't believe that we could go farther reducing the funding cost compared to what we have done in 2019.

Very clear. Thank you.

You're welcome.

And there are no more questions at this time, so this concludes the question and answer session. I'd like to turn the conference back over to Mr. Nicholas Torres for final considerations.

Thank you all for your interest in Bank Macro. We appreciate your time and look forward to speaking with you again. Good day. Thank you.

The conference has now concluded. We thank you all for attending today's presentation. You may now disconnect.